Time since appeal filed - 9 months 3 days
Time since last brief - 5 months 13 days
Pages - 25
Footnotes - 66
Summary
Siegel, formerly a registered rep appealed a NASD disciplinary action. NASD found he made unsuitable recommendations to two customers and failed to give his firm written notice of private securities transactions (selling away). He was fined $30,000, ordered to make restitution of $400,300, assessed $7,900 of costs, and ordered to serve consecutive six month suspensions from all association with a member firm. The Commission sustained the sanctions.
Discussion
Siegal became a director of a private company in late 1997. He requested permission from his firm to be a director and represented that he would not recommend the company's securities to his customers. Permission as granted subject to a condition that he not effect transactions in the company's securities. Siegal then entered into a written agreement with the company to sell the company's securities for compensation. The agreement was sent to Siegel's home address, not his business address at the BD which opened all incoming mail. Siegel also loaned the company $42,000. He was never paid for his services as a director and the loans were never repaid.
Siegel had discretionary authority over the account of a married couple. Their account had fixed income products, mutual funds, and stocks. Their primary investments were bank CDs. They had a net worth of $1.5-$2 million excluding their home. The husband was a lawyer and the couple's total income was about $150,000. Siegel in late 1997 sold the customers $300,000 of debentures in the company of which he was a director. Even though the company offered the investors an opportunity to rescind shortly after the purchase Siegel advised them to stick with the purchase which they did.
Siegel also had discretion over another couple's $1 million account. In early 2008 Siegel sold them $100,000 of debentures in the company of which he was a director.
The company lost the rights to sell its primary product in in 2002 and its corporate charter was revoked in 2004. Both investors suffered a total loss.
Siegel admitted at the hearing that one couple invested because he told them he was personally going to invest in the company. He also admitted that the sales documents he used with both couples were deficient because they had contradictory or confusing information about the details of the investment terms such as maturity dates, interest rates, and repayment terms. He admitted that these deficiencies made the investment unsuitable for any investor. Amazingly he testified "[t]his is one of the worst set of offering documents I have ever seen in my life." His defense was that he had not studied the offering documents before discussing the investment with his customers.
Siegel did not dispute his violation of NASD rule 3040 that prohibits "selling away" without obtaining written permission from the firm he was registered with. NASD rules require that securities recommendations to customers be suitable. Whether or not a recommendation has been made must be determined on a case by case basis. The standard is whether the communication with the customer was a "call to action" and "reasonably would influence an investor to trade . . . ." The Commission found Siegel's defense that he orally advised his supervisor of his selling away was unavailing because his claimed verbal notice insufficiently described the investment and sales activities.
The Commission found that Siegel indeed did recommend the investments based on an analysis of: 1) the relationship between Siegel and his customers; 2) their reliance on him; 3) the specific content of the conversations between them; and 4) Siegel's initiation of the subject of investing in the company.
The Commission rejected Siegel's defense that one couple were extremely sophisticated investors, noting in the process that sophistication alone does not mean that a communication is not a recommendation.
Also, the Commission found the recommendations to be unsuitable. Here Siegel admitted that due to the deficient offering documents the investments were not suitable for any investor. He also admitted he had not read the documents before discussing the investment with his clients. Thus it was impossible for him to reasonably evaluate the potential risks and rewards of the investment.
The Commission upheld the sanctions. One of the primary factors that supported this conclusion was Siegel's conflict of interest due to the fact that he was a director of the company and had disclosed that to only one of the couples. In addition he violated a directive from his firm that prohibited him from selling investments in the company after he became a director.
The Commission upheld the consecutive suspensions imposed by NASD. NASD rules allow such sanctions when the violations involve "different kinds of misconduct and raise separate and serious regulatory concerns."
Siegel argued that while he caused the customers to invest, he did not cause the loss and therefore restitution was inappropriate. The Commission rejected this claim, noting that restitution is appropriate where the investor loss is a result of the misconduct. It noted that here the investor loss was the result of Siegel's inappropriate recommendations. It also noted that the fact that Siegel did not profit was no bar to restitution.
Comment
The obvious recent trend is for Commission decisions to be entered much more quickly than has been the pattern in recent years.
The Commission continues to find that selling away is a very serious violation as it lessens the protection of investors inherent in firm compliance procedures and threatens firms with potential liability.
In an interesting footnote (39), the Commission used the "prudent man" definition of recklessness found in Restatement (Third) Of Torts.
The Commission also ruled that selling away and unsuitable recommendations are sufficiently distinguishable violations to justify separate consecutive suspensions.
Finally, restitution is appropriate even if the violator received no personal gain from the conduct.
